Suppose a consumer buys two goods, $x$ and $y$ and has income of $\$ 30$. Initially $P _ { x } = 3$ and $P _ { y } =$ 3 and the consumer chooses basket $A$ with $x = 2$ and $y = 8$. The prices change to $P _ { x } = 4$ and $P _ { y }$ $= 2$ and the consumer chooses basket $B$ with $x = 7$ and $y = 1$.
A) These choices are consistent with utility maximization.
B) These choices are not consistent with utility maximization.
C) With this information it is not possible to determine if these choices are consistent with utility maximization.
D) Basket $B$ must be strictly preferred to basket $A$.

Question

Quizplus · Accepted Answer

CInitially, the consumer spends $2 \times 3 + 8 \times 3 = 30$ dollars, which uses all their income. After the price change, they spend $7 \times 4 + 1 \times 2 = 30$ dollars, again using all their income. The choices reflect a shift in consumption in response to price changes, which is consistent with utility maximization. However, without knowing the consumer's utility function or indifference curves, we cannot definitively say whether these choices are consistent with utility maximization (C). The fact that the consumer switches to consuming more of $x$ when its price increases and less of $y$ when its price decreases could suggest non-standard preferences, which might not align with typical utility maximization behavior, hence choice (B) is also correct. This scenario does not provide enough information to determine if basket $B$ is strictly preferred to basket $A$, as preferences could depend on the relative prices of $x$ and $y$.

Suppose a Consumer Buys Two Goods xxx And yyy And Has Income Of

Suppose a Consumer Buys Two Goods $x$ And $y$ And Has Income Of